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FIGCovered Bonds

Trump win may favour covered bonds

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On the eve of the US election covered bond bankers considered what the election outcome might mean for their market. A clear victory for the Republican nominee, Donald Trump, would be likely to spur risk aversion which could ultimately improve demand for safer assets such as covered bonds from strong core European issuers.

Stronger borrowers from Europe’s core are unlikely to be much affected by the outcome to US elections no matter who wins. The main expectation is that Democratic nominee Hilary Clinton will win and that the market will continue as normal.

However, opinion polls are narrow and, in the event of a Donald Trump victory, it is likely primary activity would initially grind to a halt. “If Trump wins and we have a surprise scenario, then I think issuers will definitely want to stay sidelined, but if Clinton wins we will go back to normal on Wednesday,” a covered bond syndicate banker said on Monday.

“But even if you have a risk-off situation I still think it is going to be relatively easy for core names to access the market. We’ll all have to wait and see, especially for the projects that are currently roadshowing. Those not out yet can wait for a few days or until 2017, I’m not aware of anything that’s urgently cooking.”

He suggested larger sized deals and transactions with ultra-long maturities would also be “more challenging to execute” in the event of a Trump win, but reiterated that this was not his bank’s central expectation. “A Clinton win is the central base case in which case we will have another two or three weeks of positive momentum.”

A Clinton win may raise the chance of a Fed rate hike on December 14, but since most banks will be closed for business by then, the actual repercussions of a hike are unlikely to be felt much. The more important determining factor is what the European Central Bank will do when it meets on December 8.

Bankers expect the ECB to extend the asset purchase programme by another six months. They also anticipate a widening of the eligible pool of assets which may include bonds yielding less than the present -0.40% floor. However, the -0.40% deposit rate may well be left unchanged.

Should that happen European covered bond curves would be probably steepen. “The short-end is fixed to the ECB’s action and they haven’t shown their cards yet,” said an analyst. “We could well see a more rates-driven bear market for the next couple of months.”

The Italian referendum on constitutional reform on December 4 also has the potential to destabilise markets, though it may be postponed. “Renzi has tied his name to the vote but now it looks like he’s going to play for more time due to earthquakes," the analyst said.

But if the vote goes ahead and is against him then "everything peripheral and potentially France could be hit". He went on to note that Italy’s Five Star movement, along with the National Front movement under Marine Le Pen’s in France, have both called for EU exit referendums.

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